2015 First Quarter Market Review - Sloy, Dahl & Holst
June 4, 2015
First Quarter Market Review
The first quarter of 2015 performed relatively flat. If dividends are excluded, the S&P 500 finished only 10 points higher. Without the impressive performance from Apple and a handful of Biotech firms, the NASDAQ would have finished nearly flat as well. Interest rates continued to drop providing healthy returns for fixed income investors willing to risk the unfavorable rate swings associated with longer durations. However we believe these risks aren’t worth taking. A point of interest, in our opinion, is the considerable outperformance coming from international markets. We believe this trend will continue, and investors that have become overly focused on the S&P 500 are beginning to notice.
Listed below are 2015’s first quarter returns for five major indexes:
BarCap US Agg Bond +1.61% S&P 500 +0.95% Russell 2000 +4.32% MSCI EAFE (Europe) +4.88% MSCI EM (Emerging Markets) +2.24%
We continue to hold a neutral weight in Emerging Markets, and have an overweight position in Europe within our more aggressive portfolios for the first time in over 5 years. Compared to the U.S., valuations in Europe are extremely attractive and the recent adoption of Quantitative Easing (a stimulus program) only increases the opportunity for continued outperformance from European stocks.
The Energy sector continued to lag throughout the first quarter as supply overtook demand and a strong dollar applied downward pressure on oil prices. The volatility in oil translated to the stock market. Additionally, lower oil prices should have a significant negative impact on quarterly earnings reports from many companies within the Energy sector. However, don’t be mislead. The significant decline in oil prices may cause pain for some companies, but will create a net windfall for the global economies. This is more evidence for the attractiveness if European stocks, as Europe is one of the largest global importers of oil.
We continue to practice caution with our more conservative investors, sheilding them from potential damages associated with rising interest rates. An overweight position in Financials is held for this very same reason. The big banks are in an extremely advanageous position. Removed from the negative effects of the real estate bubble they have stronger balance sheets than ever before. Rising interest rates will be an immediate boon for these companies as they’ll be able to squeeze additional revenues from their Federally mandated excessive cash reserves.
2015 will prove to be as volitile as 2014. We’re observing weakness in early earnings forecasts and these predictions won’t be assisted by surprisingly low March jobs numbers. However, the recent and quite severe winter weather season could be masking employment strength. Signs of wage growth are becomming visible, and this very important factor is essential for a robust bull market.
Confident in our current allocations we will continue monitoring for opportunities within the Energy sector and international markets. We predict interest rates to begin rising again later in the year and believe we are well positioned for that shift.